trading: buying in thirds

I’ve found that the situation arises more often than one might think where I find a stock I think it interesting but where I’m very clearly not the first one at the party. In other words, the company has potentially attractive long-term prospects but the stock is not cheap enough that I can justify buying a full position right away–and I don’t have a practical feel for how it trades. My instinct is that the price is a bit too high, but I’m not sure.

how to get involved?

What I’ll typically do is buy a third of the position I ultimately want to have.

I’ll then continue to find out more about the company and watch the stock’s trading carefully (my experience is that people, myself included, never look hard enough if the name is only in a paper portfolio–a kind of portfolio I find psychologically pretty useless, anyway).

My intention will be to buy another third on a decline of, say, 5% – 10%, assuming I don;t turn up new information, positive or negative, that overturns my whole thesis.

If I I buy the second third, I’ll wait for a further decline to buy the final portion.

What does this method get me? I have immediate exposure, in case I’m correct on the stock but too pessimistic on valuation. At the same time, I still have a chance to lower my average cost by buying the bulk of the position at a lower price.

an example

My California son and I have been talking about the Elon Musk empire for a long time. Following its weak 4Q14 results,our conversation turned to Tesla (TSLA). It’s a stock I’ve owned off and on, but my son hasn’t. (My view, (too) simply put, is that TSLA is a lot like a gold mining issue whose assets consist solely/predominantly in ownership of a reportedly fabulous orebody now under development. Such stocks typically peak the day the mine opens–when investors have to deal with facts, not dreams. Before then, the dreams are more important. )

My reading of the TSLA chart–hopefully more useful than parsing nocturnal visions with a dream book–made me think the stock continues to trade in a range between $180 and $260-ish. I was also willing to believe that TSLA’s 4Q14 failure to sell enough cars was mostly due to bad weather and port difficulties.

Anyway, I decided to buy my first third at $200. My son said he would wait for $190.

I bought his first third at around $191, where I bought my second third.

I bought his second third at $186? …and another (less than) one-third for myself there. as well.

Then the stock began to move up quickly and we haven’t bought any more.

The result: my son has a somewhat smaller position, relative to his total portfolio size, with an average cost of $188?. I have a larger relative position, with a higher relative cost, $194?. So we both have exposure, and at a lower cost than if we’d bought all at once.

Another point: We’re dealing with a discount broker where our total commission costs are around $20. Paying for two or three trades instead of one makes little difference. For a traditional “full service” broker, this probably won’t be the case.